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Wall Street hammers for sale sign in Novell lawn

Here we go again

Commercial operating system distributor and software powerhouse wannabe Novell isn't doing the credibility of its long-term business plan any favors by talking about selling part or all of the company to potential suitors.

Barron's, the Wall Street watching rag of the Dow Jones empire controlled Rupert Murdoch's News Corp, reported that it heard second-hand from John DiFucci, an analyst at JP MorganChase, that Novell was considering selling some or all of the company.

DiFucci was at a meeting with Dana Russell, Novell's chief financial officer, last Thursday and came away with the impression that the software company's top brass considered a sale as a potential way to unlock the value, as they say in the Wall Street lingo, of the company. This just means a company thinks it is worth more than Wall Street believes. (Wall Street has a high opinion of itself and a low opinion of others, generally speaking, so no surprises there.) In a JP MorganChase research note that came out after the meeting, DiFucci said that Novell had "entertained the possibility of breaking out some parts or of selling the entire company in order to maximize shareholder value given the current depressed valuation levels."

This was a pretty strong signal that Novell might be up for sale, after many years of rumors about the company possibly being acquired by IBM, Microsoft, Hewlett-Packard, and others. The signal was so strong that Novell's shares rocketed up 10.1 per cent to $4.68 a pop, giving the company a market capitalization of $1.62bn. That's one way to get the stock price to move.

But it is apparently not what Novell intended, and somewhere between Novell HQ and JP MorganChase, some wires got crossed. Because on Friday afternoon, Novell posted an 8-K form with the U.S. Securities and Exchange Commission that put the kibosh on the talk about a sale or spinout of specific units.

"In response to inquiries and recent published reports, Novell, Inc. wishes to clarify that it is continuing to operate the company in the best interest of shareholders and has no current plans to sell the company," the 8-K said. It was signed by Russell, and that presumably ends that - for now.

Maybe. Novell's Linux business, as it admitted when it reported its second quarter of fiscal 2009 financials at the end of May, is still not profitable, even after $238m in Microsoft SUSE Linux coupon cash has been pumped into the company's books over the past two years. There's another $102m that can still be pumped in as Microsoft customers activate the remaining $27m in coupons from the original $240m agreement from November 2006, plus another $75m that came from a second coupon deal the two companies inked at the end of 2008.

Without that Microsoft funny money, Novell would have had to slash costs and payroll, and would not be able to show the decent growth it has attained with its Linux business. So in that regard, it was a smart move, even if it did invoke the ire of the open source community. But depending on Microsoft to help promote Linux is not a sustainable business model.

Never say never

The fact of the matter is that no public company is ever in a state where it is not for sale. That's the nature of being public, and if someone wants to acquire you and has enough money, time is money and shareholders will take a premium today rather than waiting for growth and profits in the future. And until Novell actually shows revenue growth and the kinds of profits that a pretty substantial software company should be able to bring to the bottom line - and if not growth, than at least better profits - it will be for sale, no matter what its managers say publicly or in documents to the SEC.

The other thing to consider is that this is not the time to buy Novell, even if it might be the time to sell it.

The company's share price in March was down under $3 a share and it had a market capitalization of just over $1bn. After making cuts, Novell has got its costs under control even as revenues have flat-lined - nothing to be embarrassed about in this crappy economy, to be sure - and has managed to wring some profits out of the books in its last two quarters, spanning from November through April. To be specific, Novell has brought in $430.5m in sales and brought $26.3m to the bottom line. By contrast, for the six months before that, from May through October 2008, Novell had a considerably larger $489.9m in sales, but lost $31.4m.

It seems that $1bn or $1.62bn are pretty decent valuations for Novell at this point, no matter how much Novell's top brass might protest, and it also seems very unlikely that any company would shell out the $2.5bn to $3bn in cash it would take to buy Novell, unless that company thought it could remove substantial costs from Novell above and beyond what Novell has done itself. ®